China’s High-Performance Businesses Well Prepared for Tougher Times, Accenture Research Finds

Businesses use innovation and customer-focused business models to rapidly move up and across the value chain, closing performance gap with leading global companies

BEIJING – As China continues to move forward after 30 years of economic reform and opening up its markets to the world, China’s high-performance businesses are well prepared to enter a challenging new era as the economic environment toughens and their low-cost advantages diminish, according to findings from Accenture’s 2008 High Performance Business China Research.

Accenture’s research report, titled “High Performance Business in China: Jumping over the Dragon Gate,” marks the second time that Accenture has applied its proprietary High Performance Business methodology to assess Chinese companies. By evaluating the financial data of more than 200 public companies in China across 13 industries, Accenture’s research identified 36 high-performance businesses – companies that consistently outperform their peers across business and economic cycles as measured by widely accepted financial metrics.

“The Chinese legend of ‘Jumping over the Dragon Gate’ describes the fortitude of carps that swim against strong currents and jump over a tall gate to transform into divine dragons,” said Gong Li, chairman of Accenture in Greater China. “Chinese businesses now are facing a similar test of their endurance and ability to overcome hurdles on their path to becoming high- performance businesses. After 30 years of tremendous growth, Chinese companies can no longer rely on the combination of low costs and soaring overseas demand. A turbulent combination of structural changes coupled with decreased external demand is bringing unprecedented challenges to Chinese companies. High-performance businesses are well positioned to face this tough new era, but not all average and low performers will be able to ‘make the jump.’”

The research reveals a growing set of similarities between Chinese high performers and their global counterparts, while at the same time highlighting a growing divergence between poor performers and high performers in China. Chinese high performers are closing the performance gap with their global counterparts on the key measure of profitability (the ability to generate returns over and above the cost of capital), as their profitability increased 140 basis points on average in 2006 versus 2005. By contrast, China’s average and low performers are losing more ground compared not only with the best Chinese companies but also with their global peers – the low performers saw their profitability decrease by 140 basis points during the same time period.

“This divergence in performance is predominantly down to the progress Chinese high-performance businesses have made in moving up the value chain,” says Gong Li. “Chinese high performers are investing heavily in product quality, customer attention, innovation, talent management and strong brands – all aspects necessary to grow revenues and command higher margins for their products, which then translate into greater profitability.”

However, according to Accenture’s study, while nearly 90 percent of the Chinese high performers identify investments designed to add more value to products and services as their most important investment priority over the next three years, half (50%) of the low performers are still focused on investments designed to try and maintain a low-cost advantage.

Accenture research points out that as the macroeconomic environment toughens in 2008, the overall performance of Chinese companies is expected to come under further pressure and there will be even greater divergence in performance between high performers and their industry peers. In the face of adversity, high-performance businesses excel in positioning themselves ahead of imminent difficulty. Those poorly performing companies could face a tough future if they do not make proactive changes to move higher up the value chain.

Delving deeper into how Chinese high performers are actually better positioning themselves further up the value chain, the research reveals their strategies within each of the three building blocks of high performance: market focus and position (knowing where and when to compete); distinctive capabilities (a company’s differentiated approach to the way it builds and leverages its capabilities); and performance anatomy (the underlying cultural characteristics and mindsets that enable a company to out-execute its competitors regardless of what strategies the company chooses).

Market Focus and Position: Chinese companies that have mastered this building block are guided by the overriding need to add value to their products and services and possess a superior understanding of how to actually capture more of the source and flow of that value.

Distinctive Capabilities: Superior, distinctive capabilities are derived from innovation on many levels and on positive customer experiences at every point of interaction between company and customer. It is these superior capabilities that enable Chinese high-performance businesses to move up the value chain.

Performance Anatomy: Chinese high performers have the cultural characteristics and mindsets to propel themselves up the value chain. They are becoming “talent-powered” and leveraging IT as a strategic tool for growth as well as introducing strategies for long-term sustainability.

“In addition to adapting their strategies within each building block of high performance to proactively move higher up the value chain, there is another factor that is a make-or-break issue for Chinese companies during this time of turbulence and economic slowdown,” said Gong Li. “They need to respond rapidly to changing conditions. We have observed that global high performers always change before they must, knowing that the best way to transform is from a position of strength.”

The research provides recommendations for Chinese companies depending on their position on the performance spectrum. For high performers to remain competitive, they must keep tight control over costs as a matter of course while they look more broadly at what factors will lead to long-term success in less favorable economic conditions. They must be on alert for sudden changes in market demand, government regulations and competitors’ moves. As such, they must have the market sensing capabilities and “change-ready” mindset, as well as the organizational flexibility to adapt quickly.

For the average performer, there is no better time than now to examine their performance and identify the weaknesses that have so far prevented their elevation to the ranks of the high performers. However, time is of the essence: If these enterprises are too slow to execute the necessary change initiatives, they will find themselves trailing far behind the best and facing the very real prospect of sharing the plight of the low performers.

For the low performers, the message is stark: They must take this opportunity to learn some of the strategic and operational skills of the high performers and quickly translate those lessons into action. They must adapt their strategies while concurrently coping with the worst effects of the turmoil.

“Our research confirmed that China’s top business leaders are assertive, ambitious and realistic. They are confident of their companies’ outlook, well prepared and have the right mindset to ‘jump over the Dragon Gate,’” said Gong Li. “But this is certainly no time to relax. All Chinese businesses must face the fact that yesterday’s low-cost talent, resources and capital cannot be a basis for competitiveness in the future. The only way forward is to progressively add value to every offering and in every interaction with their stakeholders. It is time for Chinese companies to implement these changes before it is too late.”

The research is available at www.accenture.com/Countries/China/ChinaHPB2008_report.htm, www.accenture.cn and www.accenture.com.

Methodology

Begun in 2003, Accenture’s High Performance Business research initiative entails in-depth analyses of more than 6,000 companies globally. Through the research, Accenture has identified more than 500 “high-performance businesses” worldwide — companies that successfully balance current needs with future opportunities; consistently outperform their peers in revenue growth, profitability and total returns to shareholders; and sustain their superiority across time, business cycles, industry disruptions and changes in leadership.

Accenture’s High Performance Business China research methodology involves assessing companies’ five core areas of performance by analyzing 13 financial metrics from publicly available sources. Each metric is gauged for statistically significant outperformance of its industry peers. The five core areas are: (1) profitability; (2) revenue growth; (3) positioning for the future; (4) consistency; and (5) longevity.

The China report is based on quantitative and qualitative phases of research. In the quantitative phase, Accenture’s proprietary method of performance evaluation was applied to the China market to identify the high performers. The qualitative research involved a series of surveys completed by 87 respondents at company management level, as well as a number of in-depth interviews with senior executives from high-performing Chinese companies.

The 13 industries examined for the China report were: alcohol & beverage; food products; household appliances; consumer electronics; steel; pharmaceutical; industrial equipment; chemicals; computers & peripherals; textiles; utilities; telecommunications; and oil & gas.

Accenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With more than 186,000 people serving clients in over 120 countries, the company generated net revenues of US$23.39 billion for the fiscal year ended Aug. 31, 2008. Its home page is www.accenture.com.